How your residential status affects income tax in India

If you are a resident of India, all your global income, wherever received, becomes taxable in India, subject to the provisions of a double tax avoidance agreement. In case no such agreement is entered into, a resident taxpayer can claim tax credits for taxes paid on such income outside India against his tax liability on such income in India.

If you are a non-resident, you are taxed in India only on the income received in India or accrues from or concerning assets held in India. Regarding services rendered in India, a non-resident is liable for taxation. So, if your salary is directly credited to your bank account in India while working abroad, the same would still become taxable in India, even if you are a non-resident, for income tax purposes. Please note that all the income paid to a non-resident is subject to tax deduction at source without any threshold available. Certain tax benefits are available only to resident taxpayers and not to non-residents, which has already been discussed in an earlier article.

Who is a non-resident for the purpose of income tax

Generally, when determining the residential status of a person undertax laws, his physical presence in India is significant during the year. The residential status of a person may vary from year to year, so the status must be determined and verified every year for the financial year ending on 31st March. The residential status of a person can typically be determined after the year’s end based on his physical presence in India. The income tax laws have defined the term “non resident” negatively. So a person is a non resident if he not a resident of India.

Criteria based on physical stay in India

Let us understand this with an example for the financial year ending 31st March 2024. You would be a resident of India if you were physically present in India for 182 days or more during the period from 1st April 2023 to 31st March 2024. Alternatively, you would still be treated as a resident in India if you were physically present in India for 60 days or more during the year ended 31st March 2024 and were physically present in India for 365 days or more during the four years of 1st April 2019 to 31 st March 2023. For the alternative situation, you need to satisfy both conditions simultaneously.

In respect of the second condition, there is some relaxation of being physically present in India for a minimum of 60 days in respect of the following three categories of persons where you would be considered to be resident in India only if you were physically in India for a minimum of 182 days during the year ended 31st March 2024:

1) An Indian citizen who is a crew member of an Indian ship and who leaves India during that year,

2) An Indian Citizen leaving India to take up an employment outside India during that year and

3) An Indian citizen or a person of Indian origin when he visits India.

For Indian citizens or persons of Indian origin, the third category of persons, the requirement of physical stay in India is reduced to a minimum of 120 days if their income from non-foreign sources is more than 15 lakhs during the year.

So, if you do not satisfy any of the above two primary conditions, you would straightway become a non-resident for tax purposes. There is one more category of “not ordinary resident” under the tax laws within non-resident. So once you satisfy any of the two primary conditions, you will still be treated as a non-ordinary resident if you satisfy any of the following two conditions.

1. You are a non-resident for nine years out of ten years period ended on 31st March 2023 or

2. You were in India for seven years, ending on 31st March 2023, for less than 730 days.

Please note that the physical stay in India is not required to be continuous; the aggregate of stays during the relevant period is to be considered for the purpose of physical stay in India.

Criteria based on citizenship

Irrespective of your physical stay in India, you would be treated as a resident of India if you are a citizen of India and have at least 15 lakhs of income from non-foreign sources, provided that you are not liable to pay any tax in another country based on either residence or domicile.

From the above discussion, I am sure you can understand the significance of residential status for income taxation and when one becomes a non-resident for tax purposes.

Balwant Jain is a tax and investment expert and can be reached at jainabalwant@gmail.com and @jainbalwant on his X handle.

Disclaimer: The views and recommendations above are those of individual analysts, not Mint. We advise investors to check with certified experts before taking any investment decisions.

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